M&A Information Technology Best Practices

Janice M. Roehl-Anderson

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118741061
• Edition: 1
• Topic: Commerce
• Subtopic: Fusions & acquisitions

Add value to your organization via the mergers & acquisitions IT function

As part of Deloitte Consulting, one of the largest mergers and acquisitions (M&A) consulting practice in the world, author Janice Roehl-Anderson reveals in M&A Information Technology Best Practices how companies can effectively and efficiently address the IT aspects of mergers, acquisitions, and divestitures. Filled with best practices for implementing and maintaining systems, this book helps financial and technology executives in every field to add value to their mergers, acquisitions, and/or divestitures via the IT function.

• Features a companion website containing checklists and templates
• Includes chapters written by Deloitte Consulting senior personnel
• Outlines best practices with pragmatic insights and proactive strategies

Many M&As fail to meet their expectations. Be prepared to succeed with the thorough and proven guidance found in M&A Information Technology Best Practices. This one-stop resource allows participants in these deals to better understand the implications of what they need to do and how

PART I

Introduction

Chapter 1

Introduction to the IT Aspects of Mergers, Acquisitions, and Divestitures

Varun Joshi
Saurav Sharma

While many mergers and acquisitions (M&A) transactions fail to deliver value, a lesser-known but by some measures a more important fact is that the axis of value in mergers, acquisitions, and divestitures is more directly linked to getting information technology (IT) right than anything else. Information technology is generally the single biggest cost element in an M&A event (see Exhibit 1.1)—and can be the single biggest enabler of synergies. Getting IT involved early and often throughout the M&A lifecycle can be critical for effective execution and realization of benefits from a merger, acquisition, or divestiture.

Exhibit 1.1 M&A Spend Distribution

Source: Deloitte Analysis

Today, more than ever, the role of IT is under the lens as significant simultaneous disruptive forces are altering the technology landscape, and expectations are higher than ever from IT to enable changing business demand patterns. Disruptive technologies such as cloud computing, social media, mobility, and big data require a fundamental shift in the delivery and consumption of IT services. Business users now expect cheaper and more rapid deployment of technology to support business objectives through cloud computing and everything as a service (XaaS) platforms. Social technologies are enabling opportunities for collaboration, communication through social networks—the connected web of people and assets—and providing vehicles for discovering, growing, and propagating ideas and expertise. Mobility trends such as bring your own device (BYOD) are redefining mobile device management and enterprise security and privacy policies and procedures. Finally, through the application of big data, enterprises are looking to harness unstructured data formats that are not easily analyzed through existing business intelligence/analytics tool implementations.

These disruptive trends provide IT organizations with new tools to add to their arsenals, and through their appropriate utilization IT organizations can increase the likelihood of achieving three critical goals of an M&A transaction:

1. Execute an issue-free Day 1.

2. Enable the realization of synergy targets.

3. Establish future-state platforms to support business growth.

Role of IT in M&A

While the drivers for M&A can be varied, at the most fundamental level an M&A transaction is largely about realization of business benefits through synergy capture—whether cost savings or growth/strategy enablement (or both). The heavy reliance on information technology (IT) for business operations, management information, and financial reporting in today's business environment makes IT a priority item in the M&A agenda. An M&A transaction can add a significant degree of complexity to preexisting and often complex IT environments. Integrating or carving out complex systems requires a very strong focus on IT. However, companies often neglect or give low priority to IT during the early stages of the M&A lifecycle. The lack of focused IT involvement early on can have serious consequences, including:

• Unexpected integration/divestiture costs. IT-related activities are generally the largest cost items in a merger or divestiture. However, because IT is a secondary focus in most deals, the magnitude, complexity, and cost of these activities are often significantly underestimated.
• Long delays in capturing benefits. Many M&A deals expect significant synergies from economies of scale, cross-selling, consolidation of business back-office operations, and legacy system retirement. All of these synergies have one thing in common—they require major IT changes. Yet many companies put off developing an IT integration strategy and detailed IT plans until the deal is essentially closed. This delayed IT involvement can put IT in a reactive mode and make it virtually impossible for companies to achieve their aggressive goals.
• Temporary IT solutions that are expensive, risky, and wasteful. Because of the long lead times associated with IT, many companies are forced to develop and implement transition services agreements (TSAs) in order to close deals on schedule. While in some circumstances TSAs will be unavoidable, these short-term solutions for IT systems and business processes can be difficult and expensive to set up and can also increase security risks. To the extent IT has visibility early in the cycle, appropriate alternatives can be planned and developed so that TSAs are less comprehensive and complex in nature.

In order to effectively partner with business stakeholders to achieve the desired goals of an M&A transaction, CIOs and IT executives must understand the M&A lifecycle (see Exhibit 1.2), the different types of M&A transactions, their impact on the IT function, and the contributions required from the IT organization.

Exhibit 1.2 M&A Lifecycle

Key milestones in the M&A lifecycle include:

• LOI (letter of intent) signed. Period of exclusivity; due diligence initiated.
• Deal signed/announced (Day 0). Period to obtain regulatory and shareholder approvals; integration/separation planning initiated.
• Deal closed (Day 1). Financial close of the transaction; integration/separation execution.

Due Diligence

No matter what the M&A agenda may be, due diligence is not an optional process. When done effectively, due diligence can help identify risks and opportunities. The risks include sources of instability requiring immediate action. Opportunities to reduce costs, to leverage resources or assets in new areas, and to improve IT effectiveness and increase business flexibility can be identified and pursued. During the due diligence process, decisions or actions that will be needed before there is any significant progress on the merger or separation can be identified. Expectations can also be set. For example, order-of-magnitude estimates of expected costs and anticipated benefits can be developed, and resources and timeframes required to address risks and issues and to capitalize on opportunities can be identified.

In our experience, the majority of transactions fail to achieve the required level of synergy due to inadequate focus on IT due diligence up front in the transaction cycle. Including IT in preannouncement due diligence and preparation can help with the early identification of potential synergies from the M&A transaction, empower business executives to take advantage of the important role IT plays in realizing M&A synergies, and support the collaboration of business leadership and IT in determining an effective integration or separation strategy. (See Chapter 5 for a more complete discussion of due diligence.)

Key Considerations for IT Due Diligence

One of the key objectives of IT due diligence is to review IT assets, processes/operations, and organization to build a quantitative and qualitative picture of the merged or separated entity. The due diligence process incudes questioning of knowledgeable personnel, competitive benchmark analysis, and an evaluation of IT documentation across the people, process, applications, and infrastructure domains (see Exhibit 1.3). This involves looking at the key attributes in each of the domains and identifying areas in which IT is a significant or critical element of the business plan. It enables companies to evaluate the effectiveness of IT systems and IT strategy, and identify factors that could be a barrier to achieving expected results.

Exhibit 1.3 Dimensions of IT Due Diligence

People, Process, and Spending	Applications	Infrastructure
IT organization IT strategic planning and projects IT operating and capital expenditure User support (help desk, desk support) Security and disaster recovery	Enterprise (ERP, financial reporting, consolidation, human resources, etc.) Specialized (revenue-generating portals, supply chain, manufacturing execution systems, distribution and logistics, safety, risk and compliance, etc.)	Hardware (mainframes, servers, PCs, peripherals) Operating systems and databases Network Communication and interfaces to third-party providers (distributors, etc.)

From our experience, the application of the following IT due diligence best practices can significantly improve the odds of achieving expected M&A transaction benefits:

• Assign senior IT executives to help with IT due diligence. Make the seniormost member (CIO or designee) the key member in the IT due diligence team and involve the IT function in all phases of the M&A lifecycle, from preliminary due diligence to Day 1 and beyond until all key synergies have been captured.
• Team IT with business. For smooth functioning of M&A deals and to operate the program effectively, staff people from IT and from business areas to jointly drive planning and execution. This encourages collaboration and teamwork between IT and the business/functional areas, which is an effective strategy to foster a strong working relationship and sense of ownership.
• Identify IT requirements before you sign the deal. Insist the team identify IT investments that will be needed to achieve the expected short- and long-term benefits. Technology-related synergies often occur over multiple years. Also, it is essential to develop order-of-magnitude estimates for these critical IT projects to validate the magnitude and timing of the expected benefits.
• Make IT costs and timing part of deal valuation. Make IT investments a mandatory part of your valuation model, and include estimated costs for IT projects that are required for capturing the expected short- and long-term business synergies, as well as costs for software licensing and TSAs.
• Get a head start on IT projects.“Clean teams” are groups of specialists who are given special access to restricted information before the deal is complete. They can provide an early start on time-critical IT activities. For example, clean teams can be used to compare business and data models, assess the impact of the deal on the company's future IT landscape, and conduct detailed scoping and planning.
• Get your priorities straight. Every deal has an impact on IT, and it is essential to immediately inventory and assess IT projects (even those not directly related to the deal) to verify that they are still required and align with the company's future direction. Priority should be given to IT projects that (1) link to critical Day 1 requirements, (2) enable or accelerate large synergy opportunities, or (3) are essential to implementing the company's future strategic initiatives.
• Keep the pressure on. An effective Day 1 is o...